oh man it's canada welcome to the kaiser report you know. world filled with risk and so someone must be punished for it no most pop. stinks you never wrecks yes we see it of course in the financial world where we see financial disaster after financial disaster in the people of europe of athens of mature it of america must pay for it well we also see it in the whole scientific world italian scientists convicted over earthquake warning six scientists and a government official were sentenced to six years in prison each for manslaughter by an italian court on monday this is of last week for failing to give adequate

warning of an earthquake that killed more than three hundred people in like in two thousand and nine well i know this is going obviously well what about the economists who failed to predict the financial earthquake what's the penalty for them well clearly this type of science of course there is some predictable outcomes in some scientific method but in the realm of economics it's due. tea leaves raining there is no science behind it it's guesswork and best so we have to make sure we understand that when we're evaluating economists we know that basically and so a bunch of mumbo has not yet been scientific rules to establish for economics yet is still very much. we don't really know exactly what makes the economics work yet and in a way it's the opposite in economics in that you hear all the time now the man who

predicted the financial crash here that over and over every single economist or financial expert announcer introducer interviewed on a television show but you also have this. notion that there was there were people like brooksley born who predicted. that fraud would lead to financial collapse right won't economics is tied to human psychology and human nature whereas something like chemistry or physics is not tied to those vagaries so in the realm of economics you can see when human nature takes hold of bubble forms like the real estate bubble or the dot com bubble and the participants believe their own mission they believe they are god and as such no rules apply to them and their ego maniacal behavior is reflected in bubble prices which are like the wax wings of i believe it was melt under the sun there is

a crashing down to earth that that's repeated for millennia but this study economics that's human psychology so they failed to predict the earthquake but you know as we've said we've had all sorts of financial earthquakes and currency earthquakes and economic earthquakes across the world in the last five years or so and none have led the way may not have caused more fractures in the market than high frequency trading but here's the headline max from the u.k. computer based market trading beneficial a government study has found no direct evidence computer based financial trading has led to increased volatility or abuse of the markets the study says algorithmic trading automated systems for buying and selling securities can be beneficial now let me take back her from your stack there this is a lie the government who saw this person it's a scientist who is working for the government certain john that he says well john

barrington you're a liar you don't look at the evidence you don't look at the work of people like myself who have done extensive study into this high frequency trading range to flash crashes and market crashes is nothing more than high frequency pilfering and truck running by the biggest. banks from the people in your country and you're legitimizing financial rape congratulations bozo well to equate this to the scientists in italy if they had said earthquakes never cause damage earthquakes don't kill here this guy can see the evidence all around that in fact high frequency trading does not provide all the beneficial qualities that he says they do well this is another kind of a bubble this is a bubble that leads to you suppose an omniscient god like behavior this is the government government spending bubble where the government would finance people like this with someone with the brain of a pee pee brain lizard who is out there are spouting nonsensical trivia and

nonsense but believes they are the god. and this is a government spending bubble the government should cut spending up immediately for people with the optimal i like this guy but it's also part of what william k. black was saying to us and our last interview with him is that the city of london goes lobbying for fraud they look for a fraud and they know that there are plans for high frequency trading to be banned in europe there's also a financial transaction tax bill going through congress right now in america so they know that there are lots of desperate bankers they're well fraudsters looking to for a safe haven for their fraud so they're providing this government is no guarantee that they'll be allowed to operate freely here david cameron is providing cover once again for financial rapists i watched him on the prime minister question time he's very shredding bullets now the opposition is just asking him simple questions

like why are you such an idiot and he's like bob who. didn't you know he's going he's devolving he's devolving forget about skull and the prime minister himself is evolving in real time. so there is this man bart chilton. who is one of the regulators at the commodities futures trading commission texas hold'em time to fold them this is his keynote address of commissioner bart chilton before the two thousand and twelve allegro customer summit in dallas texas on october sixteenth and he said regarding high frequency trading max a few weeks ago the tokyo stock exchange closed due to technology problems we've seen a few contracts shut down for different periods of chicago in new york last month we've seen market volatility increase wildly natural gas plummeting eight percent in fifteen seconds last year one day silver plunge twelve percent in about as many minutes one energy trader lost one million dollars in one second in

a second we saw a crude tumble three dollars a minute last month we continually see sharp rises and falls in precious metals there are numerous other instances and it's a safe bet that there will still be others burchill to normal to see you have to see is correct but burchill to this day comes up whether it's the so her manipulation in london or the box office futures in the united states is name comes up over and over again if you bend to amsterdam you know you go through the red light district and you see women there naked or clashing their breasts and you know that's a sign to come on in and get you know your money taken from you that's par chilton he used to he used to make it a model in the store from amsterdam red light district you know it all looks good when you get inside though he's not going to do a darn thing about it he's out there just teasing people that to see him do you see run by former goldman sachs guy gary gensler is going to step in and do some regulation some day here jerry jones or piers five bucks to go write

a new regulation. oh you've made their own products so finally you did mention hollywood box office futures contracts is the other thing which is the political futures contracts and those are they're trying to trade those in the u.s. side until they actually get a are they allowed to know which is due to the. political futures betting they have two markets one for cash one is virtual dollars the virtual dollars are still referenced in the united states as and the charts and the price discovery as an indicator of so-called outcomes predictive outcomes and i know this story very well it's used by the science on the internet as some know. come predicting mechanism yes yes and the price is predicting the outcome just like high frequency trading is trying to manipulate the psychology of the market trying to trigger either buying or selling the same thing here in trade dot com how to swing the

prediction markets and boost mitt romney's fortune. so after the last debates max between mitt romney and barack obama. somebody spent seventeen thousand eight hundred dollars on in trade driving romney's contract from forty one dollars up to forty eight dollars well within six minutes it plunged back down to forty one dollars so somebody some mysterious trader lost one thousand two hundred fifty dollars for shares that subsequently collapsed in value they ask was this just someone who made an expensive trade or was somebody trying to influence in trade odds in order to sway perceptions of the race as we saw it on the show many times price propaganda if you create the price the public will buy into that as quote unquote reality in train is an extremely easy market to manipulate it's routinely manipulated we all are back to john mccain and his operatives manipulating the john mccain contractor and that race and that manipulating the mitt romney contract to

try to influence those outcomes so a couple of things first of all markets are not predictive that's false that's not that's a false so that's brokers tell customers to get them to give them their money that they can they they know which way the market's going and if they if they did they wouldn't be asking you for your money they wouldn't be talking to you they'd be on an island somewhere sipping champagne markets will give you an indication of what people are really in to estimate the future might be today that this is the market price today is what people are estimating the future to be however that does not there's a fifty fifty chance that they may or may not be right it does not predict outcomes that's a completely false statement number one number two in trade as a virtual market that builds on my technology never got a penny from them thanks dublin based scam artists they have a market that is fairly interesting in terms of making markets in virtual outcomes

however if in fact they did begin to tell. if anything with certainty it would be co-opted by shysters as it is doing now we saw the same thing in box office futures contract in hollywood and started predict outcomes from box office a year in advance so what happened n.b.c. took it over they got it they used cantor fitzgerald they moved it to the world trade center and they got it out i don't have and so it didn't have a bad ending but this is not the case here this is a complete scam well in trade itself says they've looked at these trades they saw nothing wrong they said the same thing about the john mccain two thousand and eight manipulation moment as well but just like this surge on betting ten we saw nothing wrong no sign of anything negative or manipulative and high frequency trading here in the u.k. well go get back to serve john beddington the scam artist pheromone adrenaline time frequency trading high frequency trading is most of the time computerized wash trading simultaneously buying and selling to move the price up and down this way perceptions again it's not economics it's psychology people want to invest in

a quote unquote winner if they can move the price to something that's higher people are going to vote that way because they instinctively go toward the winner people are effectively logs you know you put a little small salt in front of them that's the way that they'll go that's the basic human mind and they know that in this virtual world the price perception you give a higher price and these slobs are cargo if you're french are going to move in that direction and that's it that's ours that's so simple minded unfortunately when democracy died ten or fifteen years ago in america what we better place now with the slugfests and virtual markets and fake prices and high frequency trading and it is here in the u.k. condoning financial right. all right stacy armor thanks so much for being on the kaiser in part thank you so much and for the second half of the show all be talking to lisa shepard about a financial transaction tax to kill high frequency trading. you

know sometimes you see a story and it seems so you think you understand it and then you glimpse something else you hear or see some other part of it and realize everything you thought you knew you don't know i'm tom harkin welcomes a big picture. to the. previous solar power this month the moon is the center of our universe the tides are forever while the sun's rays can be fickle innovative construction methods last cost as well as environmental damage to turbines boost efficiency with a simplified design of batteries can store energy discover a new era of clean power driven by the moon. here on r.g.p.

we go to the future cover. story. don't tell me. welcome back to the kaiser report imax keyser time now to go to new york and speak with lisa shepard contributing editor of tax notes tax analyst dot com

a washington based weekly tax journal she covers all areas of tax law including international and corporate taxation lee welcome to the kaiser report. thank you for having me all right lisa shepard why should the u.s. kill high frequency trading as you recently suggested in the pages of forbes magazine ok let's let's get our ducks in a row and think about what we're talking about here we're using high frequency trading as a shorthand for some practices that the exchanges allow and the f.c.c. sanctions that algorithmic traders are using so it was so we have to sort of keep in mind the s.c.c.s. rule in the whole mess and the promise of my piece is that. we can't really. leave the job to the f.c.c.

to stop this part because they created it now we have in the united states lots and lots of markets they are all aleck tronic and the f.c.c. want to them to be that way we've this has been a sort of thirty year process to make the markets all leck tronic so computers are doing the trading but because we now have a zillion little markets we have more than fifty little bitty markets and we have fourteen exchanges none of them have enough depth of volume to sort of really act like the new york stock exchange which means the exchanges pay high frequency algorithmic traders to basically hang around and. basically put a price quotes and these are called rebates and the rebate practices have gotten to be such that the exchanges are guaranteeing high frequency traders income from

rebates yet soley what is the financial transaction tax how would it help what is it the transaction tax is a tiny little tax on purchases or sales of financial contracts so that is not just stocks and bonds but it's also things like derivatives it's also things if you want you can put it on repos you can even put it on currency transactions what's the new york which the european union is afraid to do the point of it is there's two points in it one is to just collect revenue but the other is and this is the economist james tobin. devised this that's why it's sometimes called the tobin tax he wanted to throw a spanner in the works he wanted a tax to impede transactions he because he thought there was too much speculation and we clearly have that situation now the beauty of this when we get so high

frequency traders is they are believed to make very very tiny spreads on the order of a basis point so if you put on a financial transactions tax of three basis points as is being discussed in the united states or ten voices points as the european commission is discussing then you could wipe out their profits and you could you know send their algorithms off to go and mess up something else right and i guess then for those who are arguing that this transaction tax would impede liquidity the completely missed the point that the high frequency trading in the name of market making is actually causing these flash crashes it is actually impeding liquidity that already correct it is creating an illusion of a quick liquidity by throwing a lot of offers out there but then the we know. oh that the high frequency traders because they trade in the death direction of the tape removal acquitted in a downdraft and just disappear and exacerbate the situation let's let's also talk

about the toxic quotes the french financial transactions tax which has which is which is in place it's not in effect but it's in place would tax unfilled orders this is another thing you need to do if you really want to stop the high frequency traders as you have to put it tacks on these offers that they put up and then withdraw and that's ninety percent of the orders they post are withdrawn lease shepherd in the area of price discovery that is to say the matching of buyers and sellers is that being adequately served by our frequency trading is do are we seeing capital markets functioning in their traditional role of matching buyers and sellers with classic price discovery or with high frequency trading is something else going on what is going on inside frequency traders throw out a lot of prices that they then were attractive they retract ninety percent of the offers that they make and they do this to head a price where they can have

a timing advantage remember that with co-location they have an informational advantage. over the consolidated tape what what what what an order what an order matching server is doing is it's sending from all our little exchanges in the united states it's sending the orders to a console to another server that's making a consolidated tape and that is supposed to be the national best bid and offer what a high frequency trader can do is that and they can beef that in two ways one way they beat it is sometimes they do get the information before the server that's doing the consolidated tape gets ok the next way they beat it is that they even if they're not getting the information faster they're getting better information they're getting a private cost of mice feed from the exchanges remember that the exchanges are for

profit institutions they're making all their profits from fees for have that they collect from high frequency traders for co-location right you're talking about one financial issues here one is front running and the other one is price manipulation so you're saying that the i'm not really talking about pres manipulation i'm mostly talking about front running right but just a roll roll back a second you're saying that in terms of price discovery moment ago you're saying that the price is is being is being classic buy and sell is being overridden by high frequency trading and so therefore moving the price outside of what would be the normal market that's a manipulation of price correct. i would not call it moving the price i would call it knowing the future by having superior information and faster information ok well that would be splitting hairs and a semantical different. one is pretty new laser work as

a what is front running of guys out in front running this is when you guess insider information and people are taking advantage of that information to trade. everybody else right so that's just basically insider jabbing correctly and that is well the exchanges would say that members have always had these advantages and some of these side frequency traders are designated market makers which means they are entitled to have this information first the funny thing about their designated market maker status is because the exchanges in america are self regulatory organisations they don't have the responsibilities that the old market makers had the responsibility to keep buying into downdraft the responsibility to keep inventory so the securities act of thirty three and thirty four if i recall it states quite unequivocally that the market makers are not allowed to act on price information

ahead of their role as a broker so they can let their role as a dealer interfere with their role as a broker so yes it's true that these traders have dual roles as brokers as well as dealers but that doesn't mean that there read it commit a crime which is what the f.c.c. is or is not alleging this crime go forward the f.c.c. by what you're saying is allowing this crime to take place they doing so because they're corrupt they're stupid they're inept or all of the above. they were acting genuinely shocked the other day when they. imposed a five million dollar fee on the n.y.s.e. for letting high frequency traders have information ahead of sending the information to the consolidated tape the f.c.c. wanted to create a situation where you had lots and lots of markets because they thought the

competition would give you better prices that's sort of not really necessarily happening but they've they've created this monster and i think that they they they couldn't really predict the consequences of what they created remember that one of the things they wanted to do was smash down spreads to nothing we have succeeded in doing that so much that really the only people can make money in the markets are high frequency traders who are thought to be making only one basis point that's why when we talk about financial transactions taxes of a basis point or more we figure well if this is their profits then we can knock them out with a transactions tax of three basis points or as the european union is talking about ten basis points let's talk about another issue here hide not slide orders what's that all about you know what that's about is you're putting up an order but it's not making it all the way to the consolidated tape what that issue raises is

it raises issues of you know broker responsibilities to clients and some high frequency traders are also part of securities dealers so they've got clients as well as their own prop book and we think that they're doing things to benefit their own prop book that disadvantage the clients the other issue which is a whole issue for another day that this brings up as dark pools which is where the big institution. go to hide from high frequency traders right ok you're right that is a bit of a side issue the dark pools in the dark it is that it is a side this is a whole part of the shadow banking system but i just wanted to wrap up here and ask you this question in terms of co-location of servers that you mentioned before on the front running of training that high frequency trading is often used to give you

an example if i go to my neighbor's home and i stick to been their gas tank and i siphon gas out of their gas tank. which is similar to coal locating a computer next to an exchange and putting high frequency trading in there to siphon off capital can i go to the judge after siphoning off the gas and claim that i'm merely making a marketing gas. well a you can you can tell the judge that you're a designated market maker or you can tell the judge that you're a member of the exchange you can tell the judge that the exchanges rules permit you to co-locate for me if i have a proprietary feed might permit you to have the proprietary feed ahead of everybody else and then you can tell the judge look exchanges are self-regulatory organizations and all the f.c.c. has sanctioned these practices because the exchanges say they need to get follow you to grow so basically what they're doing is they're sort of having these high frequency traders around to create the illusion of volume in their exchanges and

the reason we use the word illusion and andrew haldane of the bank of england is use words like that is because we know from the flash crash that these traders disappear when the prices go into a down draft and we also know from the flash crash and this was the see if p.c. working paper that the. they can exacerbate the downdraft by the act of disappearing on mosques least shepard rather time thanks so much for being on the kaiser report thank you. and that's going to do it for this edition of the kaiser report with me max kaiser and stacy herbert now with my guest list shepard of tax analysts dot com if you'd like to send me an email please do so at kaiser reported r t t v dot ru until next time nice guys are saying.

this is the center of our universe the tides are forever while the sun's rays can be fickle innovative construction costs as well as environmental damage one brand new turbines boost efficiency will to simplify design and who needs batteries can store energy discover a new clean house were driven by the mood. here. we go to the future.